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Continuation Vehicles Drive Growth in Secondary Market

Leonard Green targets $1.5 billion for its debut in the growing $135 billion secondaries market, expanding into single-asset continuation vehicles.

By Max Weldon

5/15, 17:41 EDT
Blackstone Inc.
Morgan Stanley
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Key Takeaway

  • Leonard Green & Partners targets $1.5 billion for its first secondaries fund, "Sage," focusing on sector-leading single-asset continuation vehicles.
  • The secondary market is poised for growth, with projections of $135 billion in deals this year, up 17% from last year.
  • Interest in real estate debt and non-bank lending rises as firms like Morgan Stanley acquire significant loan portfolios amidst a sluggish commercial-property market.

Leonard Green's Secondary Fund Launch

Leonard Green & Partners, a Los Angeles-based firm, is venturing into the secondaries market with a target of $1.5 billion for its debut general partner-led secondaries fund. The firm, under the leadership of managing partners John Danhakl and Jonathan Sokoloff, has initiated discussions with potential anchor investors. This new fund, known internally as "Sage," aims to invest in single-asset continuation vehicles, focusing on companies that dominate their sectors. Leonard Green plans to achieve a first close in the latter half of the year, marking a strategic expansion of its investment portfolio. The firm has bolstered its team for this endeavor by hiring David Fox, formerly of Blackstone Inc., and Garrett Hall, an alum of AlpInvest Partners.

Growth of Continuation Vehicles

The private equity sector is increasingly utilizing continuation vehicles to offer liquidity solutions to investors like pension funds and endowments, allowing them to hold onto assets longer than traditional fund structures typically permit. High-profile examples include TPG Inc.'s placement of Creative Artists Agency into a continuation vehicle and Madison Dearborn Partners' transfer of insurance brokerage NFP into a similar fund. These vehicles have become a popular tool for managing investments in a way that aligns with longer-term growth strategies and exit planning.

Secondary Market Dynamics

The secondary market is experiencing significant growth, driven by a combination of factors including higher interest rates and a challenging environment for exits. PJT Partners projects that the volume of secondary deals will reach at least $135 billion this year, a 17% increase from the previous year. This growth is also reflected in the emergence of credit secondaries, with private credit expanding to $1.7 trillion. The market for these transactions is becoming increasingly vibrant, with most deals involving first-lien direct loans and pricing for partner-led portfolios in the first quarter ranging between 88 cents to 93 cents on the dollar.

Real Estate Debt and Non-Bank Lending

Morgan Stanley's acquisition of approximately $700 million of property loans from a venture that includes Blackstone Inc. underscores the active interest in real estate lending, particularly in a sluggish market for commercial-property deals. This trend towards non-bank lending is gaining momentum, with investment firms stepping in to fill the void left by traditional banks. The shift is largely driven by stricter capital regulations and the fallout from U.S. regional bank failures, with a focus on sectors showing resilience or growth, such as logistics and multi-family rentals.